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Homophily in Social Networks and Labor Market Outcomes

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Homophily in Social Networks and Labor Market Outcomes Homophily in Social Networks and Labor Market Outcomes Emmanuel Valat1 Université Panthéon-Assas Paris II & ESSEC Business School Version: April 2010 We develop a labor matching model where information about vacant jobs is partly obtained through contacts. From this framework we study the correlation between some charateristics of the structure of social networks and labor market outcomes. Workers are embeded in di¤erent network structures according to their type -or origin. Following recent theoretical and empirical …ndings, we consider that two characteristics of network composition are endogenous for each type: homophily -the tendency to associate with individuals of the same type- and network size. These two characteristics are a¤ected by changes in three key elements, the relative size of each group in the population, average preferences for same-type ties and biases in meetings. Our numerical simulations suggest a positive relation between network size and labor market outcomes, which is in line with the literature. Simulations however suggest something less expected, a positive correlation between homophily and labor market outcomes for members of the minority group. The relation is reversed for the majority group. We discuss conditions and explainations for this correlation. We furthermore notice that the way the three key elements we mentioned above a¤ect labor market outcomes for each group is in line with the growing empirical literature on the subject. Key Words: Social Networks, Information Transmission, Homophily, Unemploy- ment. JEL Classi…cation: J15 ; J64 ; D83. 1 ERMES (EAC-7181 CNRS) Université Panthéon-Assas Paris II and ESSEC Business School. Ad- dress: Emmanuel Valat, Université Panthéon-Assas Paris 2 (ERMES), 12 Place du Panthéon, 75230 Paris Cedex 05. France. Phone: +33 1 53 63 53 46. E-mail: [email protected] 1 1. INTRODUCTION It is now widely admitted that information transmission about job vacancies through Social Networks -SN below, for short- a¤ects labor market outcomes2 . Yet, a very few studies have focused on the way SN a¤ect inequalities between groups. We do not thus exactly know in which conditions members of ethnic minorities bene…t or not from the fact that a part of jobs are found through contacts. The common belief about the impact of SN on inequality between groups in the labor market is that members of the majority group will bene…t from word-of-mouth communication more than members of minority groups, unless members of the minority group are well organized. The work of Tassier & Menzcer (2008) -T&M below, for short- which constitute as far as we aware the single theoritical attempt to investigate this issue, tends to con…rm this belief. T&M show from a controlled experiment that members of the minority group will clearly bene…t from word-of-mouth communication about job vacancies only when SN are segregated3 and since both members of the minority’s SN and job networks4 are tied into little clusters5 . In some ways, they demonstrate that many conditions are request for information transfer about vacancies through contacts being at the advantage of members of the minority group against members of the majority group. For many reasons we will detail below, we contest this conclusion and construct a model where we show, unlike T&M, that information transfer through SN will most of the time bene…t to members of the minority group against members of the majority group. In fact the study of T&M do not take into account recent …ndings from the literature on network formation which show that the level of segregation in SN vary with the relative size of each group in the population. Indeed, in T&M the level of segregation is the same for both of the two groups. Taking into account that segregation in SN for both types6 vary with the relative size of each group, we show that by construction, communication through contacts will bene…t, all other things being equal between the two groups, to members of the minority group. Before describing with more details our model and our main results, let us tell more about why the level of segregation in SN partly depend of the relative size of each group in the population. In fact, recent works such as the one of Currarini Jackson & Pin (2009) -CJ&P below, 2 See the seminal works of Rees (1966) and Granovetter (1973). See also Ioannides & Loury (2004) for a literature review on the subject. 3 Segregation in SN re‡ects in T&M the fact that individuals tend to be tied with individual of the same type. The tendancy to form friendship with individual with similar characteristics is also often refered in the literature as "homophily" in SN. We thus can mention some "homophily rate" or "segregation rate" in any individual’s SN. 4 Jobs may be structured into networks. In this case, an employed individual will only transmit a job o¤er about job vacancy which is linked to his job. If jobs are not linked in the economy (the case where there are only independant workers), an employed individual will transmit an information on a vacancy he randomly heard about. 5 This works only for a high enough level of segregation in SN and when members of the majority group, unlike members of the minority, are randomly tied. "Randomly tied" in T&M means that they are not linked into little group of four individuals where they all have frienship with each other. 6 "Type" in our model will refer to ethnic related patterns. 2 for short, the work of Moody (2001) or the one of McPherson & al (2001), have shown that segretation in social relations depends on the ability of individual to realize their more or less strong preferences to form friendship with individual similar to themeselves7 . Segregation in SN is in fact positively correlated, all other things being equal, with the relative size of the concerned group in the society even if meeting opportunity biases also play an important role as we will see below. T&M, without introducing segregation in SN in taking into account this feature, miss as a consequence some strong speci…cities of segregation in SN. In order to take into account with more precision segregation in SN, we rely upon the model of network formation of CJ&P. CJ&P have built a model where they replicate for each ethnic group in the population average homophily8 rates -the proportion of individual of the same ethnic group among ties- and average number of contacts they observe in many US high schools9 in function of the relative size of each group. More precisely, in CJ&P’smodel, network formation depend on three exogenous variables: the level of preferences for same type ties and two things which a¤ect the ability of individuals to realize these preferences, meeting biases through same type and relative size of each group in the population. When both preferences and meeting biases are …xed, homophily varies with the relative size of each group in the population. Taking into account this model of network formation modify, as we show in our model, the results of T&M in relaxing the conditions for homophily in SN being at the advantage of the minority group. Our theoretical model of the labor market with SN is inspired by the one of Calvò- Armengol & Zenou (2005) -C-A&Z below, for short- which has been modi…ed by Ioan- nides & Soetevent (2006) -I&S below, for short. These last two models study the impact of the average number of contacts between workers in the economy on labor market performances10 . We rely upon these theoretical works because they o¤er a more sim- ple framework for numerical computations than the one of T&M. In the …rst part of our model we brie‡y illustrate how simultaneous variations in the three parameters we mentioned above in‡uence for each type both the average homophily rate and average number of contacts. In the second part of the model11 , in a similar theoretical frame- 7 One of the most pervasive feature observed in SN is the tendancy of individuals to associate with individuals similar to themselves. If age, gender or socioeconomic status are in‡uencing characteristics of friendship formation, ethnic related patterns are by far the most in‡uencing ones (see for instance Lewis & al, 2008; Grosseti, 2007; McPherson & al, 2001; Moody, 2001; Marsden, 1988). This legitimates the fact that "type" in our model refer to ethnic related patterns even if our results may also be tested for gender or socioeconomic status. 8 Henceforth, we will mention "homophily" in SN as in CJ&P instead of "segregation" in SN. 9 Their model feets very well with empirical observations about the two characteristics of networks we mentioned. Their data come from the Add Health inquiy set from 112 US high schools. 10 C-A&Z study the impact of uniformly distributed number of contacts among workers whereas I&S study the impact of randomly ditributed number of contacts. C-A&Z …nd a critical size of networks from which the competition between worker in a network a¤ect at the matching function. I&S do not …nd any congestion e¤ect when the number of contact is not uniformly distributed among the population of workers. In the same subject see Wahba & Zenou (2005) for an empirical work with data from the 1998 Egyptian Labor Market Survey. 11 There are no strategic links between labor market outcomes and the way networks form. In other words, network formation does not depend on any outcome expectations from the labor market.
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